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Minnesotans spending more of their income for housing

Minnesota is typically among the three leading states for home ownership. A strong economy, an influx of residents and low interest rates helped propel Minnesota to the top of the home ownership list in 2005. Nearly 76 percent of residents own their home. That's nine points above the national rate.

But home owners are also paying more for housing compared to their incomes. The increase is partly because of rapidly rising home values and higher interest rates. But Christopher Galler, senior vice president for the Minnesota Association of Realtors, says the increase also reflects a change instituted by lenders. The ceiling for borrowing money relative to a person's income is much higher now than it has historically been.

"Thirty percent had always been the standard that Fannie Mae, Freddie Mac and HUD had used. All three of those organizations expanded it and said we'll allow you to use different ratios, because we really care about how much you pay, not how much of your income goes to it," he said.

Stephanie ClausenMPR Photo/Art Hughes

Lenders now allow loans that require some borrowers to pay as much as 48 percent of their income on housing.

In 2000, a little under 17 percent of Minnesota homeowners crossed the line to pay 30 percent or more of their home budget on housing. That number jumped to almost 25 percent of homeowners in 2005. The increase is even higher for renters. The data reflect such things as monthly payments, property taxes, maintenance costs and utilities.

Galler says the first half of the decade also saw a prime environment for home equity loans. He says those loans are beneficial for homeowners who put the money back into their home.

"Unfortunately, they're using it for cars and clothing and vacations. We're seeing a lot of home equity loans withdrawal for frivolous items, I guess you would say."

Spending more on home costs is not necessarily a bad thing according to Thomas Musil, Director of the University of St. Thomas' Shenehon Center for Real Estate. Home ownership remains a solid investment and building wealth is a clear boost to the economy. But, Musil says, people on the lower end of the economic scale will have a particularly difficult time making ends meet.

"You've heard the concept of 'house poor' where people put all of their disposable income into maintaining the household. With mortgage principle and interest, taxes and insurance, utility costs, things like maintenance and even snow-plowing and other incidentals that go along with home ownership, take a bite out of the household budget in some cases," he says.

Home ownershipMPR Chart by Betsy Cole

Musil says some parts of the Twin Cities have seen 300 percent increases in housing prices in the last 15 years. He says people's incomes have not kept the same pace.

But there are strong signs that trend is slowing.

After the U.S. Census Bureau gathered the current data in 2005, interest rates inched up and homes for sale lingered longer on the market. That's unwelcome news to people trying to sell their homes. But it's a good trend for others like 26-year-old Stephanie Clausen, a St. Paul floral and landscape designer. She's rented the same apartment for eight years. High real estate prices have kept her from buying a house. But she's now aiming to buy a place of her own in the coming months.
"I hear from a couple different people that prices are expected to moderate a little bit. And I'm not in a tearing hurry so I guess I'm in a good position to wait," she says.

In the booming housing market before 2005, waiting would potentially mean getting out bid by another buyer. Minnesota Housing Finance Commissioner Tim Marx says there are clearly down sides to a slowing housing market, but a slight correction can be healthy.

"It can, depending upon where interest rates and other factors go, also make housing more affordable and slow down the huge increases in housing prices that allow more buyers to get into the market," he says.

According to the Census Bureau the median value of Minnesota homes grew to almost $199,000 in 2005 from $122,000 five years before.